"Price Stability Target" of 2 Percent

The Bank of Japan Act states that the Bank's monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy."

Price stability is important because it provides the foundation for the nation's economic activity. In a market economy, individuals and firms make decisions on whether to consume or invest, based on the prices of goods and services. When prices fluctuate, individuals and firms find it hard to make appropriate consumption and investment decisions, and this can hinder the efficient allocation of resources in the economy. Unstable prices can also distort income distribution.

On this basis, the Bank set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013, and has made a commitment to achieving this target at the earliest possible time.

The new policy framework consists of two components: the first is "yield curve control" in which the Bank controls short-term and long-term interest rates through market operations; the second is an "inflation-overshooting commitment" in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed CPI exceeds 2 percent and stays above the target in a stable manner.

1. Yield curve control

As shown in the Comprehensive Assessment, QQE, which was introduced in April 2013, has brought about improvements in economic activity and prices mainly through the decline in real interest rates, and Japan's economy is no longer in deflation, in the sense of a sustained decline in prices. With this in mind, yield curve control, in which the Bank seeks a decline in real interest rates by controlling short-term and long-term interest rates, has been placed at the core of the new policy framework.

The experience so far with the negative interest rate policy, which was introduced in January 2016, shows that a combination of the negative interest rate on current account balances at the Bank and purchases of Japanese government bonds (JGBs) is effective for yield curve control. In addition, the Bank has decided to introduce new tools of market operations, such as fixed-rate purchase operations, to facilitate smooth implementation of yield curve control.

2. Inflation-overshooting commitment

The Bank has introduced an inflation-overshooting commitment, under which it continues expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. Through this commitment, the Bank aims to enhance the credibility of achieving the price stability target of 2 percent among the public.

With a view to persistently continuing with powerful monetary easing, the Bank decided in July 2018 to strengthen its commitment to achieving the price stability target by introducing forward guidance for policy rates, and to enhance the sustainability of "QQE with Yield Curve Control."

The Bank's Conduct of Monetary Policy to Date

The Bank introduced QQE in April 2013, expanded it in October 2014, introduced supplementary measures in December 2015, introduced "QQE with a Negative Interest Rate" in January 2016, and enhanced monetary easing in July 2016. For details, see the following.